EchoStar offers $32 billion for Hughes

Unsolicited bid for DirecTV aims to block Murdoch

AllenWan

NEW YORK (CBS.MW) - Shares of EchoStar Communications fell 5 percent Monday after the No. 2 U.S. satellite TV carrier made an unsolicited $32 billion bid for Hughes Electronics in an effort to head off a rival deal with Rupert Murdoch's News Corp.

The deal appears to represent an eleventh-hour attempt to trump a rival offer by News Corp. The proposal arrived in the form a "bear-hug" letter to the board of General Motors, the controlling shareholder of Hughes. It came a few weeks after GM rejected an EchoStar offer amid antitrust concerns.

Satellite giant

A merger between the country's top two satellite broadcasters would create a $56 billion giant that would better compete against cable and broadband companies for subscribers, Ergen said.

"U.S. consumers would also benefit from the combined company's ability to enter new markets with local service, provide additional content, increase HDTV offerings, accelerate the introduction of next-generation broadband services and offer nationwide competitive pricing," he said.

In the letter, Ergen cited $36 billion in savings through reduced programming costs and lower subscriber acquisition costs due to economies of scale. He said an additional $20 billion in revenue could be generated by boosting coverage in less densely populated areas and more than doubling the number of communities that have satellite access to local programming.

"Even with a small premium, Ergen's offer is theoretically compelling because of the potential for vast synergies," satellite analyst William Kidd of Lehman Brothers told clients on Monday.

Still, Kidd said he believes the larger News Corp. remains in "driver's seat," but the media company may finally be forced to reveal its actual offer and speed up the acquisition process, which has dragged on for months behind a shroud of secrecy.

"Rupurt Murdoch really needs a major U.S. broadcaster," concurred Scott Chase, a longtime satellite industry follower and chief executive of The Strategis Group.

In any case, a bidding war is good for Hughes shareholders, analysts noted.

Antitrust concerns

Aside from a News Corp. threat, EchoStar could also face regulatory obstacles. DirecTV is the nation's largest satellite TV broadcaster with just under 10 million users. EchoStar is No. 2 with about 6 million subscribers to its Dish Network. The pair control nine out of every 10 U.S. satellite customers, with the rest are scattered among a handful of small independent operators.

Ergen argues that regulators should view the satellite carriers as just one segment of the broadcast market. Even if EchoStar and Hughes combined, the entity would still have to compete against traditional broadcast networks as well as giant cable TV operators.

"It's critical that regulators consider us part of the pay TV market," One large company is more competitive, and better for consumers, than two week ones," Ergen said on Monday during a conference call.

The only areas where competition would be reduced would be in the parts of rural America where cable does not offer service and over-the-air broadcasts are hard to receive. Still, Ergen noted that residents in those areas would receive the same nationwide pricing as customers in urban areas where cable competition flourishes. They'd also have the option of choosing an older big-dish service, he said.

In any event, EchoStar said antitrust experts it queried, including superlawyer David Boies, has concluded that an EchoStar-Hughes merger would pass regulatory muster. Boies gained famed as the lead lawyer for the U.S. government in its successful antitrust suit against Microsoft.

Reversing course

The latest offer represents an about-face for Ergen, who had indicated to analysts during a recent conference call that he would not interfere with a deal between GM and News Corp. See previous story.

According to recent reports, News Corp. has proposed that Hughes shareholders own more than 50 percent of the combined entity and GM receive about $7 billion in cash and notes for its 30 percent interest in Hughes. News Corp. wants to bundle Hughes with its foreign satellite assets to form a global broadcasting giant.

Talks between News Corp. and GM have dragged on, but the two companies were within a few weeks of clinching a deal, The Wall Street Journal reported.

In Sydney, News Corp.'s shares turned down on the news, falling 3.3 percent to $18.25 Australian dollars.

Spokesmen for Hughes, GM and News Corp. couldn't be immediately reached for comment.

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